State, SEC hit Putnam, 2 managers

In March 2003, Omid Kamshad, Putnam's chief investment officer for international equities, made an $852,557 trade into the firm's Europe Equity fund, of which he was the lead Putnam manager, that he cashed out four days later for a $79,000 profit, investigators said. This and other trading records released yesterday appear to contradict, in stunning detail, Putnam's statements that it cracked down on excessive short-term trading by employees three years ago.

The records were made public as the federal Securities and Exchange Commission and Massachusetts Secretary of State William F. Galvin unveiled complaints against Putnam and the two managers alleging civil violations of federal and state securities laws for allowing or engaging in repeated rapid trades in and out of the company's mutual funds.

Putnam said yesterday it regretted that market timing took place at the firm, but denied that it committed fraud.

Kamshad's attorney, John Gilmore, yesterday said that "these actions were filed precipitously. We will defend against the claims vigorously, and reiterate that the trades did not violate any rule, regulation, or statute."

The allegations raised the stakes in the unfolding nationwide probe into fund timing, which involves rapid trading that lets savvy investors reap quick profits on short-term movements in stock and bond prices, most often in foreign markets. Many big names in the investment business have been snared in the market-timing investigations, including executives at Janus Capital Group Inc. in Denver, and Bank of America Corp.'s NationsFunds in Charlotte, N.C.

While such trades are not themselves illegal, regulators say fraud statutes prohibit fund companies from forbidding some investors to make short-term trades while allowing others to do so. Most mutual fund companies in their prospectuses and other legal documents strongly discourage such trading, saying the trades diminish returns to long-term investors.

Regulators were particularly critical of a pattern of trades that Kamshad and the second money manager, Justin M. Scott, made after the two allegedly were notified in early 2000 that such trades weren't allowed.

Scott has not returned phone calls seeking comment, and his attorney could not be reached yesterday.

Galvin also detailed more than 2,600 trades into and out of one fund made by 10 members of the Boilermakers Local Lodge No. 5 retirement fund in New York, in apparent violation of the published guidelines for the fund. The trades netted the 10 union-plan members a profit of $4.1 million over the three years, including a profit of $1.15 million for one member identified in the complaint as "boilermaker #7." Galvin's complaint alleged Putnam committed securities fraud by letting the boilermakers make repeated trades.

Galvin slammed Putnam for not removing the four managers it caught timing the market until reports of their trades were disclosed to the Globe last week. "How could the company continue to let them operate these funds when they knew what they were doing?" Galvin asked. "What makes this so egregious is they did know, and they concealed it, and they engaged in corporate deceit."

Meanwhile, Putnam disclosed yesterday that it is investigating whether other employees had made excessive short-term trades in recent years. As late as Monday, Putnam chief executive Lawrence J. Lasser said there were six employees at the firm who had been timing the markets.

Putnam confirmed that Kamshad and Scott are being forced to leave for trading into and out of their own funds. The company also identified the two other managers who are leaving, Geirulv Lode and Carmel Peters, senior portfolio managers who invest in global securities.

Lode and Peters did not return messages seeking comment.

The company declined to identify the remaining two, but said they are on leave and are not managing money. Putnam has said it will now reimburse the funds of the $700,000 in profits the six made from their trades.

Company spokeswoman Nancy Fisher said Putnam believed that Lasser "was informed in 2000 that there was an issue in trading in the investment department but that it had already been taken care of."

Kamshad made 38 "round-trip" trades -- that is, bought and then sold shares in a mutual fund -- between 1998 and 2003, regulators said, including at least 17 short-term trades after a February 2000 memo in which a Putnam human resources executive wrote that Kamshad said "he would cease this type and level of transaction going forward." Kamshad held the shares for an average of 13 days, regulators said.

Regulators said that Scott made 35 round-trip trades between 1998 and 2000, including 20 between March and May 2000 -- after he had received a copy of the earlier memo about problems with Kamshad's trading.

"There's something particularly acute about a conflict of interest when it's the portfolio manager of the fund affecting trades for his own account," said Stephen M. Cutler, chief of enforcement for the Securities and Exchange Commission. That the two continued to trade after being notified they shouldn't, Cutler said, "bears on their level of culpability."

Fisher yesterday raised questions about whether the trades in 2002 and 2003 by Kamshad fit the definition of market timing. However, she added, "It was short-term trading, and we don't condone it." She said that Scott has said he doesn't remember receiving a copy of the February 2000 Kamshad memo.

Both Galvin and the SEC said their investigations were continuing and that they would demand changes at Putnam to prevent future abuses. They also would insist that the company pay penalties, and that the employees repay profits from the trades and agree not to make further such trades. Galvin said he would also insist that Putnam reimburse the funds for profits made by the boilermakers' members, as well as make a public admission that the company violated "consumers' trust" and its "fiduciary duty" to shareholders.

Yesterday, Putnam said "we deeply regret that any incidence of market timing took place," and that the company's systems to detect market timing were not "100 percent effective." But, Fisher said, "the failure of our system does not rise to the level of fraudulent conduct," adding that the company is now "trying to create a system that prohibits short-term trading by employees."

Andrew Caffrey can be reached at caffrey@globe.com.